New Laws Protect Consumers or Ease Restrictions on Creditors

By Michael J. Bologna

March 1 — Wisconsin and Missouri are taking two very different approaches to a national tidal wave of consumer debt litigation, driven by aggressive junk-debt buyers.

Wisconsin, a state long recognized for maintaining some of the most rigorous consumer protection statutes in the nation, is embarking on a major revision to its consumer credit laws that critics contend will roll out a welcome mat for the junk-debt industry. Meanwhile, in Missouri, Attorney General Chris Koster (D) proposed a series of revisions designed to protect consumers from “the Wild West world of debt collection.”

Missouri Attorney General Chris Koster (D) proposed a series of revisions designed to protect consumers from “the Wild West world of debt collection.”

Wisconsin Gov. Scott Walker (R) signed legislation Feb. 29 that consumer advocates believe will shift the balance of power from borrowers to creditors, debt buyers and debt collectors in litigation involving delinquent credit transactions. Wisconsin Assembly Bill 117, enacted as 2015 Wisconsin Act 155, would relax the pleading burdens placed on the debt industry, such as the type of documentation required, using state courts to compel consumers to make good on past obligations. 

A very different story is unfolding less than 500 miles away in Missouri. While Wisconsin lawmakers were finishing their work on A.B. 117 last December, Koster called on the Missouri Supreme Court to amend the state’s rules of civil procedure to curb abusive debt collection litigation. In addition, Koster proposed new “zombie debt” regulations, which would bar debt buyers from filing suits on time-barred debt.

Two Regulatory Responses

Diane Standaert, director of state policy for the Center for Responsible Lending (CRL), told Bloomberg BNA that Wisconsin and Missouri present two very different regulatory responses to the debt-litigation problem flooding state courts.

“We are concerned there will be abuses of the Wisconsin courts with filings of suits that might not be valid, suits that don’t pursue the right people for the right debts,” Standaert said. “Wisconsin’s posture, in terms of state-level activity, contrasts with states that are increasing protections rather than weakening them. A number of states have actually taken steps to rein in abusive practices over the last few years through legislative improvements, enforcement actions by attorneys general, or rulemaking.”

Judith Fox, a professor of law at the Notre Dame Law School in South Bend, Ind., said there has been consistent tension in state legislatures in recent years between consumer rights organizations and the credit industry over debt collection practices and courthouse rules governing debt litigation. Fox said Wisconsin’s changes run counter to trends being seen in states such as California, Maryland, Missouri, New York and North Carolina, which have sought to limit abusive collection tactics and require creditors to demonstrate clear entitlement to any alleged consumer debts.

“The national trend is to require more debt documentation, not less documentation. This bill in Wisconsin flies in the face of that,” said Fox, a member of the Consumer Advisory Board of the federal Consumer Financial Protection Bureau (CFPB). “The fact that a state is making it easier to get default judgments is problematic.”

Easy Credit Trend

The action in state legislatures corresponds to consumers' affection for easy credit in recent years and the resulting growth in the third-party debt industry.

According to CRL, one in seven Americans is being pursued by collectors, on an average debt of $1,500 per consumer. In many cases, these consumers are not interacting with the original provider of credit. Thousands of third-party companies purchase portfolios of debt charged off by financial institutions, credit card companies, health-care institutions and lenders specializing in home, auto and student loans. After purchasing portfolios of debt, frequently for as little as three or four cents per dollar on the face value of the portfolio, these third-party, or junk debt, firms attempt to collect on the liabilities or hire separate collection agencies and law firms to perform this function.

A 2014 report by the Federal Reserve Bank of Philadelphia estimated that the U.S. third-party debt collection industry employs more than 140,000 people who process more than $50 billion in recoveries each year.

The industry has endured increasing criticism for employing strong-arm collection tactics and abusing state courts to collect outstanding debts. The CFPB has said the debt collection industry ranks as the single largest source of consumer complaints to the federal government.

The international human rights organization Human Rights Watch expressed concerns about the industry last month in a landmark study, “Rubber Stamp Justice: U.S. Courts, Debt Buying Corporations and the Poor.” Among other things, the report concluded weak civil procedures in most states and aggressive legal tactics by the industry have triggered a human rights emergency.

“Human Rights Watch research indicates that there are unique problems with the way many courts approach debt buyer lawsuits,” the report states. “These problems raise human rights concerns from the perspective of fair adjudication of rights, as well as their negative impact on the security of the defendants’ basic economic and social rights such as rights to housing, food, and clothing. This makes it imperative for court systems and policymakers to urgently address these problems squarely and on their own terms.”

CFPB to Release Proposed Rules

The CFPB is responding both as an enforcement agency and as a rulemaking agency under its Fair Debt Collection Practices Act authorities.

Fox said the CFPB is tentatively scheduled to release regulations on debt collection activities this summer, giving the industry and consumers greater clarity on best practices for fair debt collection and consumer protection.

Regardless of the federal action, Fox and Standaert said states have important regulatory roles to play through their debt collection and consumer protection statutes. States also establish legal standards and civil procedures for adjudicating disputes involving the collection of delinquent debts.

Evidentiary Standards

April Kuehnhoff, a staff attorney at the National Consumer Law Center (NCLC), said the third-party debt industry has been successful in lobbying for some states to soften the evidentiary burdens placed on debt buyers seeking to prove in state court that a consumer has defaulted.

Kuehnhoff said three states have enacted such laws in the last four years. In 2012, Arizona enacted H.B. 2664, which permits creditors, in an uncontested court action, to establish the amount of the debt that is owed on a credit card account through a single copy of the final billing statement. Tennessee enacted virtually identical legislation under S.B. 224 in 2013. That same year, Arkansas enacted H.B. 2028, which provided creditors and debt buyers with a presumption of accuracy in credit card debt cases with a final billing statement.

Kuehnhoff said these state laws are problematic for consumers because debt buyers often carry unreliable evidence in the debt portfolios they purchase from credit companies. As a result, she said debt buyers frequently:

  • sue the wrong consumer;
  • seek the wrong amount;
  • attempt to collect on debts that have already been paid;
  • file actions on debts barred by the applicable statute of limitation; or
  • seek payment on debts previously discharged in bankruptcy.

    These evidentiary problems are compounded by the fact that consumers targeted by debt companies frequently fail to respond to court summonses, giving judges wide authority to enter default judgements against them.

    Wisconsin Law: Advantage to Creditors?

    Kuehnhoff said the Wisconsin measure is the latest manifestation of the industry-driven lawmaking seen in Arizona, Arkansas and Tennessee, with a few added features.

    Proponents of A.B. 117 said the law should be regarded as a “pro-consumer” measure because it clarifies that debt buyers, or any party serving as a creditor's successor, are covered by the protections available under the Wisconsin Consumer Act (WCA).

    James M. Johannes, a professor of banking at the University of Wisconsin’s School of Business in Madison, Wis., told Bloomberg BNA that consumer debts were not bought and sold when the WCA was enacted more than 40 years ago.

    “We need laws that protect people against abusive debt collection tactics and we have them in Wisconsin,” said Johannes, who gave testimony supporting A.B. 117 as the bill was crafted. “This act—first and foremost—brings third-party collectors under our abusive practices restrictions. That is huge and no one is talking about that.”

    But Kuehnhoff said A.B. 117 also amends the pleadings provisions applicable in debt collection cases in ways that do not benefit consumers.

    The new law rolls back documentation requirements for the amount of the debt. While Wisconsin previously required creditors and debt buyers to provide judges with “an accurate copy” of all documents evidencing the pertinent credit transactions, A.B. 117 requires debt buyers to present a single “billing statement addressed to the customer” for a date after the default. In addition, there is no requirement for creditors and debt buyers to itemize charges, late fees or interest.

    “This validates a business model where the debt collector simply needs a billing statement with the person’s name to take that consumer to court and take legal action against them,” said Peter Skopic, executive director of the consumer advocacy group WISPIRG. “It relies on the fact that a certain number of people will be intimidated and say, ‘Here’s a check, I’ll pay it.' This kind of practice tends to target lower income populations, lower education populations and people who don’t have the resources to contest the actions in court.”

    Easier Path for Judges

    Consumer rights lawyers also complain that A.B. 117 would loosen the requirements for courts to enter judgments on deficient pleadings. While the WCA previously barred default judgements in cases in which the creditor failed to comply with the pleading and documentation requirements, the new law permits courts to engage in a broader review in order to grant default judgments.

    “This really takes away what the judge has to do in terms of ensuring the pleading requirements are met. And it makes the process faster,” said attorney Mary Fons, who operates the Fons Law Office in Stoughton, Wis.

    Finally, A.B. 117 raises the legal standard for consumers seeking to recover costs and reasonable attorney fees. The law bars such recovery except in cases in which the consumer can demonstrate the creditor or the debt buyer’s conduct was “willful or intentional.”

    Attorney Ivan Hannibal, founder of the Consumer Rights Law Office in Madison, Wis., said this shift would discourage attorneys from representing consumers.

    “I am usually able to take these cases on a contingency basis because if I’m successful, I can collect attorney’s fees,” Hannibal said. “So the other side has to know what they were doing and do it right. It was a safeguard. But now, to collect those attorney’s fees, the consumer has to prove that creditors and debt collectors have willfully violated the statute. And that is going to be an almost impossible burden to prove.”

    Criticism Rejected

    Robert Hornik, a debt industry attorney and spokesman for the Wisconsin Creditors Rights Association, denied suggestions that A.B. 117 was designed to disadvantage consumers in debt collection actions.

    Hornik, a partner with Rausch, Sturm, Israel, Enerson & Hornik LLC in Brookfield, Wis., said the new law is designed to “remedy ambiguity in the law.” In particular, he said, the law previously required debt companies to provide judges and consumers with the figures necessary to compute the amount owed and copies of documents evidencing the debt. Hornik described these as “vague” legal constructs, subject to uneven interpretation in different courtrooms across the state. He said the revised requirements provide greater clarity.

    Hornik also rejected criticisms of A.B. 117 as an industry-driven bill, saying consumer organizations were given adequate opportunities to help craft the legislation.

    “They were never willing to cooperate with us, they were never willing to offer an alternative or any suggestion on how to eliminate ambiguity,” Hornik told Bloomberg BNA.

    Cycles of Debt, Poverty

    Koster, the Missouri attorney general, is pursing a very different strategy in his state, convinced that abusive debt collection and litigation strategies consign minority and low-income populations to cycles of debt and poverty.

    Koster called on the Missouri Supreme Court to impose a series of changes to the rules of civil court procedures to curb abusive debt litigation practices. He specifically called for creditors and debt buyers to:

  • provide “documentary proof” of their right to pursue collection at the outset of litigation;
  • be barred from manipulating court procedures with “stalling tactics” designed to trick consumers into missing court dates and convince judges to impose default judgements; and
  • be subject to new recovery standards to limit the current pattern of “unjustified and excessive awards” for fees and costs.

    “These proposed changes would provide important protections for consumers from the Wild West world of debt-collection by forestalling abusive litigation practices, including frivolous litigation,” Koster said in a statement Dec. 3.

    Koster also called for consumer protection regulations to address zombie debts. The regulations would bar junk-debt firms from filing suits on time-barred debt and engaging in schemes that deceive consumers into reaffirming a debt. The proposal grants the Office of the Attorney General authority to seek criminal and civil sanctions against companies engaged in such schemes.

    New York Model

    Human Rights Watch pointed to New York as having implemented the most comprehensive and just rules aimed an unwarranted default judgements in consumer debt litigation.

    In 2014, the New York Unified Court System established rules limiting unwarranted default judgements in consumer debt litigation. The rules specify that plaintiff creditors and debt buyers must:

  • submit affidavits verifying that they own the debt at issue, the chain of ownership, and that the defendant actually owes the debt at issue;
  • submit copies of key documents including credit agreements, the most recent monthly statement and documents that identify the defendant;
  • demonstrate the amount of the alleged debt, penalties and interest are correctly calculated;
  • demonstrate the alleged debt is not barred by the statute of limitations; and
  • demonstrate the defendant was properly served with notice of the debt collection lawsuit.

    Human Rights Watch noted that California, Maryland and North Carolina have adopted provisions reflecting some of the changes made in New York. In addition, the District of Columbia, Illinois, Maine, Oregon and Washington considered legislation last year accomplishing some of the goals expressed in New York.

    Notre Dame law school’s Fox said the key issue states need to confront with their overhaul efforts is the huge number of default judgements issued by courts, which are driven in part by consumers’ failure to adequately respond when sued by creditors and debt buyers.

    Fox pointed to four revision themes for addressing the default judgment challenge, including: more meaningful affidavits of debt answering critical questions about the original creditor, type of debt, dates of payments and amounts owed; better personal service procedures so consumers know they are being sued; full disclosure of the chain of custody for the debt; and, greater support for judges to ensure the evidence in each case is considered properly and the rights of the parties are respected.

    To contact the reporter on this story: Michael J. Bologna in Chicago at

    To contact the editor responsible for this story: Heather Rothman at